Risk & Compliance

Sovereign Bancorp Fires Back at Investor

The complaint is aimed at proving that the investor's demand fails to comply with corporate law.
Stephen TaubNovember 11, 2005

Sovereign Bancorp is mad as hell and is not going to take it anymore.

Officials at the Philadelphia-based financial institution are pushing back at an institutional investor, saying the bank has rejected the demand by activist hedge fund Relational Investors LLC to inspect certain records of the company.

Officials added that they rejected the demand because it seeks documents far beyond the scope permitted by Pennsylvania law, is based on “less than bona fide” purposes, and masks Relational’s true purposes in seeking this information. “It is clear to us that Relational’s true purpose in making this demand is not to gain access to the records themselves, but to attack the integrity and injure the credibility and reputation of Sovereign and its banking subsidiary for their own purposes,” noted a company statement.

Separately, Sovereign announced that it has filed suit in The Court of Common Pleas of Berks County, Pennsylvania, seeking declaratory judgment as to the impropriety and illegality of Relational’s request. The complaint is aimed at clarifying that Relational’s demand for inspection of books and records fails to comply with Pennsylvania’s Business Corporations Law because the hedge fund does not make its demand for a proper purpose under the BCL.

In addition, the Sovereign claim states that Relational’s relentless publicity campaign against the bank indicates that the investor likely will abuse the confidential nature of much of the data requested. “Relational’s conduct and public statements indicate that its true agenda is to force Sovereign to abandon its long-term growth plan that serves the best interest of all of its investors and the wider community in favor of short-term results or a possible bust-up or sale of the company,” Sovereign states in a letter to investors.

Relational is one of a handful of activist hedge funds that likes to buy stock of companies they deem to be underperforming or have poor corporate-governance practices, and then press for change. Sometimes that means seeking board seats or the replacement of the management team.

The investor owns more than 7 percent of Sovereign’s shares. It is trying to replace two Sovereign directors and attempting to stop the company from completing a deal whereby it would sell a 19.8 percent stake to Spain’s Banco Santander Central Hispano for $2.4 billion and use the proceeds to help acquire Brooklyn, New York’s, Independence Community Bank Corp. for $3.6 billion, according to Reuters.

Relational is not the only Sovereign investor unhappy with the proposed transactions, however. On Friday New Jersey’s pension fund also asked the New York Stock Exchange to stop the three-bank transaction, reported Reuters.

“It is unfortunate, but not unexpected, that Sovereign would waste shareholder funds with such an absurd lawsuit,” a Relational spokeswoman told The Wall Street Journal. Relational also has questioned the financial relationship between a number of Sovereign directors and the company. In full-page advertisements run in three national newspapers on Thursday, Relational called Sovereign chairman and chief executive Jay Sidhu and the other six directors “long-term liabilities” who should be replaced, the Journal noted.

In an SEC filing, Relational accused Sovereign’s directors of paying themselves “far more than directors at any other bank in the country.” Relational also asserted that in the past six years, loans approved by board members for fellow directors and executive officers have soared from $4.7 million to $94.1 million.

According to the Journal, Sidhu told Sovereign employees that Relational’s “massive public relations campaign” is “designed to intimidate us, create a wedge between the board and management, and . . . create shareholder and public pressure on us.”